Corporate Governance of Banks in Georgia

The governance of banks in transition economies Georgia country report 2012 Table of content Table of content ........................................................................................................................................... 2 Foreword ...................................................................................................................................................... 3 A. Methodology and overview of the banking system in Georgia ............................................................. 4 1) Methodology .................................................................................................................................... 4 2) Overview of the banking sector in Georgia ..................................................................................... 4 Executive summary ....................................................................................................................................... 8 3) Legal framework .............................................................................................................................. 8 4) Supervisory practice......................................................................................................................... 9 5) Bank practice.................................................................................................................................. 10 6) Key recommendations ................................................................................................................... 12 7) Overall assessment of bank governance quality in Georgia .......................................................... 14 C. Analysis of the strengths and weaknesses of the corporate governance of banks in Georgia ............ 17 8) The strategic and governance role of the board ........................................................................... 17 9) Composition and functioning of the board.................................................................................... 21 10) Risk governance ............................................................................................................................. 27 11) Internal control .............................................................................................................................. 30 12) Incentives and compensation ........................................................................................................ 34 13) Transparency to the market and regulators .................................................................................. 35 This Report does not constitute legal advice. Readers are advised to seek appropriate legal advice before entering into any transaction, making any determination or taking any action related to matters discussed herein. The contents of this Report are copyrighted. The assessments and views expressed in the Report are not necessarily those of the EBRD. All assessments and data in the Report are based on information gathered in the course of 2011. For information or comments please contact Gian Piero Cigna at [email protected] - The team is grateful for the assistance provided by all parties interviewed. In particular, the team would like to acknowledge the precious assistance offered by Eristavi Law Firm (http://www.elg.ge) and Begiashvili & Co. Limited (http://bco.ge). Georgia Country Report – 2012 PAGE 2 of 37 Foreword In 2011, the Legal Transition Team of the EBRD launched a comparative assessment of the corporate governance of banks in its countries of operations. The overall objective of the assessment is to inform and support the EBRD’s policy dialogue with authorities with a view to generating further commitment to improve the corporate governance of banks in EBRD countries of operations. The assessment aims at providing the EBRD with an overview of the legal and regulatory framework governing the corporate governance of banks and how diligently the various rules and best practice guidelines are implemented. The assessment focuses mostly on internal corporate governance arrangements in banks, particularly the role and composition of boards. It analyses the legal and regulatory framework; its implementation by supervisors; and the practices developed by the largest, more systemically important banks in each country. The transparency of governance arrangements to the supervisory authority and the markets is also reviewed. While the assessment analyses banks and their boards, and considers ownership structure and patterns in the banking sector, broader governance issues covered in the OECD principles such as shareholder and stakeholder rights and responsibilities as well as equity market issues are not dealt with in any detail. To enhance the EBRD’s understanding of the corporate governance of banks in countries of operations, countries reviewed are subjectively rated. For this purpose, the legal framework, supervisory practice and banking practice are given an overall score in the executive summary section of each country report. In addition, the performance of countries in the key areas mapped out in the EBRD checklist is also rated and included in the executive summary section of each country report. The rating approach is detailed in the box below. Rating “Strong to very strong” - The corporate governance framework / practices of supervisory authorities / practices of banks are fit for purpose and are close to best practice. “Moderately strong” - Most parts of the corporate governance framework / practices of supervisory authorities / practices of banks are adequate but further reform is needed “Weak” - The corporate governance framework / practices of supervisory authorities / practices of banks contain some elements of good practice but overall the system is in need of reform “Very weak” - The corporate governance framework / practices of supervisory authorities / practices of banks contain significant risks and are in need of significant reform Each country report is divided into three sections: (A) Methodology and overview of the banking system; (B) Executive summary; (C) Analysis of key strengths and weaknesses of the corporate governance of banks and policy recommendations where appropriate. Georgia Country Report – 2012 PAGE 3 of 37 A. Methodology and overview of the banking system in Georgia 1) Methodology 1. The analysis and recommendations contained in this report are based on research carried out by the EBRD and responses to written questionnaires sent to one Georgian law firm; the National Bank of Georgia; the Georgian Association of Banks and three among the larger banks in the country. Responses to the questionnaires were complemented by face-to-face interviews carried out in Tbilisi in March 2011 during which the EBRD assessment team met with respondents to the questionnaires, as well as representatives of the Georgian Stock Exchange. 2. Based on best practice assessment checklist, the questionnaires and interviews inquired about the legal and regulatory framework on bank governance, supervisory practice and the practice of banks in Georgia. In 2001, the largest banks in Georgia - measured by their share of the total assets of the country’s banking system - were the Bank of Georgia, TBC Bank; Procreditbank, Liberty Bank and Bank Republic (Groupe Société Générale). Together, they controlled 81.81% of the total assets of the Georgian banking system (see Exhibit 1, below). Exhibit 1: The five largest banks in Georgia by share of total banking assets Total Assets in Share of total asset Bank name (5 largest banks) Listings thousands GEL* of banking system 1. Bank of Georgia 4,665,261 36.79% GSE (List A) and LSE 2. TBC Bank 3,300,021 26.03% No 3. Procreditbank 971,846 7.66% No 4. Liberty Bank 733,235 5.78% GSE (List B) 5. Bank Republic (Groupe Société Générale) 702,450 5.54% No Total 5 banks 10,372,813 81.81% Total banking system 12,679,084 100% Source: 2011 Annual Consolidated Account of Banks1 2) Overview of the banking sector in Georgia 3. As of December 31, 2011, the Georgian banking system comprised 19 banks of which 17 are resident banks and 2 are branches of foreign banks. The total assets of the banking system amounted to GEL 12.679bn (approx. EUR 5.86bn)2 and constituted 52.3% of GDP. Foreign capital participation is present in every Georgian banking institution. As of February 2012, the share of non-residents in the banks’ paid-in capital equalled 85.6%.3 1 Information about total assets of the banking system may be found at: http://www.nbg.ge/index.php?m=306 (Assets and Liabilities of the Commercial Banks); and the information about the each individual bank may be found at: http://www.nbg.ge/index.php?m=404 2 At 30/12/2011, the exchange rate EUR/GEL was 1 EUR = 2.163 GEL (see http://www.freecurrencyrates.com/exchange-rate-history/EUR-GEL/2011) 3 Source: National Bank of Georgia, Annual Report 2011 (http://www.nbg.ge/uploads/publications/annualreport/2011/annual__eng_2011_webnew0309.pdf) Georgia Country Report – 2012 PAGE 4 of 37 4. Banks are organised as joint stock companies under a two-tier system where the general meeting of shareholders (‘GMS’) appoints the supervisory board ('SB', or 'board') members and, in turn, the SB appoints the management board members ('MB'). 5. As the National Bank of Georgia pointed out in its 2011 Annual Report, the banking sector is represented by powerful strategic investors, including large European and regional banking and international financial institutions. The supervisor is confident

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